Building a Retail Store II

By Patrick Wagner

December 6, 2017

Part Two: Securing a suitable location and starting the application process are critical components for a successful endeavor

Although it’s not a universal rule, most municipalities require business owners to prove they have a suitable location prior to applying for a license. It’s similar to what Sinatra crooned about love and marriage: when it comes to securing a location and license, “You can’t have one without the other.” But that’s only for a successful union, the reality is that an unlicensed location can be as common as a loveless marriage.

The complexities of applying for a marijuana business license are well-known, but the process of finding a good location can be fraught with zoning codes, gouging landlords, fraudulent claims and other challenges.

In order to help alleviate the stress of hunting for real estate and applying for licenses, part two of Marijuana Venture’s three-part “Building a Retail Store” series looks at how entrepreneurs can accomplish both and avoid the pitfalls that keep many hopefuls out of the industry.

Uncle Ike’s location in Seattle’s Central District has been credited with bringing a surge of income to an area that was once notorious for illicit activity.

Location

Just like any retail business or real estate investment, location is king when it comes to cannabis.

For example, even in a city like Seattle, monthly revenues for marijuana retail stores can range from less than $10,000 up to $1 million — largely based on the location.

In many parts of the country, a potential business owner will need to have a suitable location secured in order to be considered for a license.

To find a location, Lauren Rudick, a partner at the New York-based law firm Hiller, PC, says to start by networking in the commercial real estate community and speak with developers and brokers about potential sites. Be sure to review the history of any area to see if other cannabis operations have been chased out previously, she says.

Amanda Ostrowitz, the co-founder of CannaRegs, an information hub that tracks municipal regulations on cannabis businesses, says there are resources entrepreneurs can use to determine where a cannabis retail store can open its doors, including software from companies such as hers, land use and zoning attorneys and real estate agents.

The other option, she says, is “to get down and dirty.”

“You can do it on your own, but it’s not going to be easy,” she says. “It depends on the skillset of the person that is looking.”

In many cities, the governing agency for cannabis businesses will post on its website a zoning map of the region, colored with approved areas for specific licenses — but not all municipalities will make it this easy for cannabis business hopefuls.

Serra’s location in Portland, Oregon has brought new income into the city’s Old Town District, while also preserving a historic building.

Robert Selna, chairman of the Cannabis Industry Group for Wendel Rosen in Oakland, California, says cities often outline “green zones” where potential cannabis businesses can operate. But looking deeper into a building’s property codes can help applicants avoid a costly mistake, he adds.

“Look at the code itself and see if, within that green zone, a retail operation of the type they’re talking about conducting is allowed,” Selna explains. Some areas have very specific parking requirements or even codes that mandate certain levels of a multi-story building on which a cannabis retail store can be located, he says.

“Just because it’s in the green zone doesn’t mean that you can automatically operate there,” Selna says. “Most people see a green zone and an address within the green zone and think they are good to go. That is truly not the case.”

According to Danny Zlatnik, an attorney with Dickenson Peatman & Fogarty in Northern California, if a property is a central factor in the business application, as it would be in California, the first step is to start networking with professionals who have experience in setting up zone-specific businesses.

“I’m not talking about attorneys so much as I am about architects, environmental consultants, accountants and civil engineers,” Zlatnik says. “If you don’t have those people involved from the beginning, when it comes time to send in for your local permit, you’re not going to have a plan that checks off all the boxes that the local authorities are going to need.”

Getting Creative

When Paul Goetz was looking for a suitable location in Mesa, Arizona, the zoning map for the city was divided into five sections and cannabis operations were limited to industrial zones. One section of the city did not have a single property that was zoned as industrial. Since it was clearly shown on the map that there were no suitable locations, none of the city’s applicants searched there.

“But there was actually a county island and within the county island they had their own set of zoning rules that were different than the city of Mesa,” says Goetz, chief revenue officer for Tryke Companies in Nevada and Arizona. “I was actually able to find one property out there that was correctly zoned. I was able to tie that one up and we were able to get the license.”

Although Goetz had a background in zoning law, no one told him to research that small county island on the map. He found it by paying attention to the smallest details. After taking a closer look at a seemingly uninhabitable zone, he was able to secure a property isolated from competition. It was a tangible reminder for Goetz that zoning doesn’t start and stop with a map.

Somewhat hidden within the boundaries of Mesa, Arizona is an unincorporated county island that allowed Paul Goetz to find a property eligible for a cannabis business.

Location hunters should keep in mind that unique conditions such as Goetz’s hidden gem can occur from the state level all the way down to local municipalities. They should also note that these governing agencies most often operate on taxpayers’ dollars, meaning questions about zones, land use codes and other concerns can often be answered with a simple phone call.

When in doubt about a prospective location or even a definition, call a zoning lawyer or real estate professional, Ostrowitz says. More often than not, they can give enough perspective to put a search back on track.

When a suitable property is found, contact the owner or landlord to begin the negotiation phase — and be up-front about your intention with the location. Property owners who are wary of leasing to a cannabis business will typically out themselves as such — either by attempting to price gouge or indicating that they will be more trouble than the property is worth.

“It’s safe to say, at this point in time, that landlords know the value of a location in the ‘green zone,’” says attorney Jasun Molinelli, a partner at Archer Norris. “There is a prevailing perception that people and businesses in the cannabis space are wealthy, cash-flush and easy to leverage. So, across the board you’re going to see an increase in price-per-square-foot in rental or purchase properties.”

In order to balance the perceived risk of leasing to a cannabis business, landlords will commonly seek extra protections in the agreement, Selna says. For example, if a tenant loses their license, the landlord would definitely want to have them vacate the premises to avoid any threat of legal action. Selna says these protections can also be structured to protect the applicant if they fail to receive a license.

“You shouldn’t sign a lease until you know whether it’s likely that you can get your permit,” Selna says. “If you like, you can ask for a provision in the lease that if you don’t (get a permit), the lease terminates.”

Zoning maps, like this one from the city of Los Angeles, come in many forms, each highlighting locally applicable specifics such as 1,000-foot buffers, eligible retail properties and possible cultivation sites.

Operators should also be aware that the industry is thick with private investors who would be willing to buy the property outright and lease it back to them. But developing a real estate relationship can be tricky, and while it is possible to handle the agreement alone, many operators, consultants and attorneys encourage opening the war chest for a zoning attorney or real estate agent with specific knowledge of cannabis regulations to help draw up and negotiate the lease agreement.

Molinelli warns entrepreneurs to watch for any indications that a land owner is not who they purport to be. Make sure the person you’re dealing with has the authority to enter a lease or purchasing agreement, he says. States that require a location prior to applying will also want to see an approval for the operation from the land owner on record.

“The main threshold to getting licensed here is really local land-use compliance, that you have permission from the locality to conduct the business as you plan it,” Zlatnik says.

Rudick says the most common pitfall of getting licensed is failing to secure a suitable location in a timely manner.

“Without it, you can’t address the bulk of the application,” she says. “It’s important to speak with anyone (in a leadership position) who has successfully gone through a similar process.”

License

For most entrepreneurs, receiving a license is contingent upon securing a location. Both require money, but the Catch-22 is that many investment firms won’t provide capital without a license.

“Without a license, it becomes a crapshoot and that’s a lotto ticket that we’re not buying,” says Hadley Ford, a former investment banker for Goldman Sachs and now CEO of iAnthus Capital Holdings.

Applying for a license can be straightforward for those fluent in legalese and government-speak, but challenging for everyone else. It can seem mired in complex language about alphanumeric codes and terms with either incredibly concise definitions of specific scenarios or impossibly broad explanations that are left to the reader to interpret. It all depends on the state, jurisdiction, current regulations in place and the ability of the applicant to understand them.

“Find a city that has an application process in place and print out the entire application and the applicable local ordinance, along with any pertinent notices,” California attorney Michele Brooke wrote in a column published in the September issue of Marijuana Venture. “Make a checklist of what the application requires. … Go through the actual steps of filling out the application and prepare a binder labeling each necessary item.”

Brooke recommends getting input from industry operators, lawyers, government representatives and anyone familiar with the licensing process. While Internet searches are a useful tool, they can only display what people have taken the time to write and upload onto the Web — and many results come with an agenda. Plus, the Internet can often be a source for too much information. A Google search for “marijuana zoning” produces more than half a million results, far more than any individual can sift through.

A certain amount of money will be required to get through the first phase of the application in most states. Molinelli says fees in local jurisdictions in the Bay Area, for example, run from $5,000 to $20,000 and he expects the state fees to be around the same amount. In highly restrictive and competitive states such as Illinois, New York and Pennsylvania, application fees can easily run in the six or seven figures.

Molinelli says to start with the free resources available to better grasp the requirements that need to be met in the applicant’s area. He suggests going to the applicable department in person, just to avoid any missteps.

“Often just a minor oversight or an inadvertent failure to include a certain document or site plan or notice of intent can lead to a denial of an application,” Molinelli says. “Obviously, any sort of misleading or fraudulent representation on an application is a slam-dunk denial. These will always be interpreted as an attempt to mislead.”

Rudick recommends becoming an expert in the applicable regulations and learning the requirements as step one for a successful application.

CannaRegs co-founder Amanda Ostrowitz.

Ultimately, every state and local jurisdiction is going to have a wildly different set of requirements and regulations.

“You can write a novel about this,” Ostrowitz says.

Ostrowitz says some applications will require a specified location; others will not. Applicants must first research where they intend to do business to determine the correct path. Start with the governing body’s website and search for “cannabis” or “marijuana.” The first item to look up is if the area is even accepting applications or when the next round of submissions will open, Ostrowitz says.

If the online searches don’t provide the answers, call the governing agency directly or do as Molinelli suggests and make a visit in person. Most agencies, especially during application season, will have a pre-recorded FAQ before the call reaches a live operator or selection prompt. In 2014, when Washington was ramping up to launch recreational sales, many applicants were quick to blame a failed application on the Washington State Liquor Control Board — but expecting a state agency to admit wrongdoing and correct the action might be too much to hope for when a multimillion-dollar investment hangs in the balance.

Be Prepared

With the potential for millions of dollars to be made and the high cost of entry just to get in the legal cannabis game, it is imperative to make sure you’ve done all the footwork, paperwork and research necessary to put yourself in the best position to not only get a license, but to run a successful retail operation.

The process is not simple, but the experts say following these guidelines in the beginning can make it easier to get the location and license needed to pave the way for a smooth launch in any city or state.